plus support for heart health. ( crowd roars ) that's a great call. one a day men's. i'm jim cramer, and welcome to my world. >> you need to get in the game. >> firms are going to go out of business, and he's nuts! they're nuts! they know nothing! >> i always like to say there's a bull market somewhere. >> "mad money." you can't afford to miss it. hey, i'm cramer. welcome to "mad money." welcome to cramerica. other people want to make friends. i just want to try to make you some money. my job is not just to educate but to entertain. so call me at 1-800-743-cnbc. tonight's show is devoted to helping you cramericans avoid some of the most common and money-losing mistakes that investors can make.
and recognizing misinformation when you see it. the best way to do this is with discipline, meaning with rules. oh, no. come on. these are serious rules. all right? focus. and today i've got five to help you make money in what can be an incredibly bewildering, confusing, and even infuriating market. if you follow my rules, you should be better able to recognize an opportunity when you see it. and to manage to avoid losing money when you don't have to. let's get down to business. tonight's first rule, do not dig in your heels when you're wrong. or in the immortal words of the late, great economist and equally accomplished investor john maynard keynes, when the facts change, i change my mind.
what do you do, sir? one of the easiest mistakes to make, and i know this works because i've done it countless times myself, is to refuse to change your stripes after the facts are in and you have been proven wrong. it's natural to dig in your heels and refuse to change your mind when you think you're right. but the market's gone against you. it's also a quick and easy way to lose a lot of money. i've been blasted into reality over and over and over again whenever i dug in my heels on either side. you're always angry when you get run over. and you're always willing to take it out on the people who are on the other side, the ones who got it right. the fact that i am open about it, that i actually read the angry e-mails and talk to furious people, has helped me to learn stories and learn how to invest. but it's also been a big exercise in pain.
that's right. and i have to tolerate the pain -- >> the house of pain! >> -- even when the e-mails are the most hurtful. because that's when i know perhaps that i am at the most right. for example, i got an incredibly heavy volume of hate mail after the market bottomed in march of 2009, and then we rallied much higher. when the dow jones industrial average was down to 6500, about exactly at the bottom, i came out here and on "stop trading" and said that the downside was minimal. and i thought you had to start doing some -- >> buy, buy, buy! >> i knew there just couldn't be that much more down side because what i had done was put together a doomsday scenario, basically a model of where i thought the market could go in the worst case. i tallied individually from the bottoms up all the members of the dow jones averages and presumed for my calculation that every single financial in the averages went to zero, goose egg, including bank of america
and general electric. yes, parent company of this network. people consider it a financial because of its big ge capital division. i presumed that citigroup is going to go to zero. and i even presumed that jpmorgan was going to go to zero. and on top of all that, i took into account the total elimination of dividends at caterpillar as well as 3m. and then i added in the potential bankruptcy of alcoa. >> the house of pain. >> sell, sell, sell! >> for good measure. you've got to admit those are pretty dire assumptions. and you know what? even under those ghastly conditions, with all of those bankruptcies, going to zero situations, i still could not get us a low that took us down significantly from where prices already were. from the moment i made that call, remember, it was a bottoms-up call. i didn't say that i liked the market a. i said, look, i add all these up, and i take a minus three and
minus three and minus five, and people were calling me crazy, but i could not get the dow prediction lower. and people said i had no idea what i was talking about. but a month later, with the dow 1,500 points higher, those people were still there. they were still sending me e-mails that were even more impassioned, even more angry, claiming that it was still way too soon to tell whether we were going to get a bottom and who was i to say it? now, if you find yourself making that argument, you are probably digging in your heels when i think you should be changing your mind. it was hard for me to change my mind. i had been negative. people know i was negative at dow 11,000. dow 10,000 i told everybody to sell. it was hard to change my mind at dow 6500. but i couldn't get a number that was lower. see, it's hard for the most emotional investors and traders out there to come to terms. believe me, i know that. but it's also crucial if you want to be a good investor. you have to be willing to change your mind when the facts change. people do this all the time with stocks. but we would never allow ourselves to make the same argument about sports.
would you ever claim that your favorite basketball team still had a chance of coming back from behind to win an hour after the game ended? what about a week? how about a month? a month after a big loss do you say you're still about to win? of course not. if anyone did that, they would think you're insane. i'm just urging you to apply the same level of rigor to stocks that you would to sports. the facts are always changing in this business, and at some point you need to be willing to acknowledge that the game is over and that you were wrong. i am not trying to be glib about this. it's part of the emotional side of investing that, while difficult to measure, is just as important as the intellectual side. even if very few people in the financial media will talk about it. swallowing your pride is never easy, particularly on national tv, but the more time you spend digging in your heels, the less you have to take advantage of the new situation and profit
from it. surely the dow at 6500 is a better bargain than dow at 11,000 or 10,000. how can you know for sure that it's time to say to your thesis, game over? if you find yourself needing to come up with more and more and more excuses and reasons why things will ultimately go your way, then it's probably a good time for you to instead start pondering why they haven't. oh, and remember, you do have a gigantic edge on me. i am on national tv, on cnbc, which is in about 90 million homes, calling the market's direction five days a week. so it's so much easier to say just you wait and see and not have to eat any crow than it is to admit defeat. you don't have to worry about publicly embarrassing yourself. you're doing it on home. so focus on those potential profits and not your ego. no one even knows you changed your mind. everybody knows that we've got the dow at 6500. cramer's wavering on his negative thesis.
i thought he was really negative. well, the facts had changed. and the bottom line, when the facts are in and you've been proven wrong, do not dig in your heels. change your mind. let's go to craig in connecticut. craig? >> caller: jim, big connecticut shoreline boo-yah. >> man, that's a dynamite boo-yah. and i've got to tell you, an underrated shoreline boo-yah back at you. >> caller: all right. thank you. >> you're welcome. >> caller: jim, i had the good fortune to catch a stock make a huge move up, nearly doubling in a few months. as you recommend in your book, i took my original investment off the table and let the profits ride. >> right. >> caller: the run appears to have stalled due to some not so good news about the earnings. this is fundamentally a good company, but i'm now concerned about a sudden big pullback. do you ever recommend buying puts to protect profits in such a situation? >> okay. let's talk about puts. i spend a lot of time talking about puts in my first book that just came into paperback, "real money." and the bottom line on my puts, i'm just going to cut right to it. the bottom line is if you indeed
are worried about a stock, don't ensure it. if the worry turns out to be untrue, you'll lose money on the insurance. if the worry turns out to be something that is very, very bad, you will -- but it doesn't happen and the news doesn't come out within the time of the puts, you'll have to buy a new insurance policy next month and another insurance policy, another insurance policy. sell the stock. you're worried, sell the stock. if it goes up, you say, listen, that was a great gain. no one ever got hurt taking a profit. if it goes down, hallelujah. if you think it's a long-term good story, you'll buy it back. no puts. we're not recommending puts on this show. we're just not going to do it. let's go to joyce in california. joyce. >> caller: hi. boo-yah. thank you. >> boo-yah. >> caller: for leading "mad money" in a language a beginner can understand. >> thank you, joyce. i spent a lot of time thinking about what happened to goldman sachs. when i got to goldman sachs in the '80e'80s, i used to look in
moor and literally practice the kaydance of the jib rush i try to bust on the show, using the terms i heard because they were so alien to me. i then became so imbued in the terms that was difficult for me when i started the show teen switch back to english. but you have correctly, i think, understood one of my mantras, which is speak english on the show even though others don't because they either want to impress or they've forgotten the language. how can i help? >> caller: well, keeping it simple really helps me to understand it. >> thank you. >> caller: my question is at what point should i take a percentage loss on a bad investment? when a stock comes -- when a company has had trouble with the securities and has gone down. will a product come back? >> okay. >> caller: what percentage do i take the loss? that's my question. >> all right. we do not use percentages on this show. there are whole systems based on percentages, "investor's business daily," which i read, very heavily weighted toward percentages. there's lots of people who think that the key is to figure out what level you will not lose money lower.
i disagree. if the thesis has changed and the fundamentals have gone awry or the accounting is irregular, then we sell, sell, sell, no matter what. but if we bought for investment and the thesis is still intact, that's an opportunity to buy. >> buy, buy, buy! >> now, it seems like, joyce, you indicate that the fund the fundamentals have changed, mentals have changed. cut your losses. mark in california. mark. go ahead, mark. you're up. >> caller: jim, a ten-story beer-amid boo-yah to you from thousand oaks, california. >> man, we have to build that kind of beeramid. i'm all over my staff. they build them offline. i want them on the set. what's going on? >> caller: sounds good. i've noticed numerous times on your show you've used the words "catalyst" and "momentum." what are the differences between two and how can i utilize them to make mad money? >> great question. these are important trading terms. and they, by the way, are only trading terms. a catalyst means there's a specific event coming up. let's use the case of a major
quarter coming up that -- apple computer's going to have a new product introduction. apple computer's going to have a quarter reporting. that's a catalyst. you might want to get in front of it to be able to game it. now, momentum just means that the earnings per share growth is growing, perhaps in excess of what the estimates are saying. that's got momentum. one has to do with earnings. one has to do with events. don't confuse the two. my first new rule in this special show. when the facts change, you've got to change your mind. stay with cramer. with expedia, i've got the building blocks
welcome back to this disciplinary edition of "mad money." i'm not talking discipline as in crime and punishment. or the cat o'nine tails, you know -- i like that. i mean investing disciplines. rules that can help you sidestep losses and help you try to make money in an incredibly befuddling, scary stock market. the next rule i want to tell you about, one that i've developed based on 30 years of investing insights, is among the most important i can ever teach you,
and that is that price, the entry price that you buy a stock, matters. price matters so much, it means that you can buy the stocks of companies you don't like all that much if they go low enough and become attractive because of price. in fact, for the right price even inferior merchandise is worth buying, as long as it's not deteriorating. some of the best opportunities i have ever seen have come from holding your nose and buying the stocks of companies that you never imagined wanting to own in the first place because they've just finally become so darn cheap. now, i will never on this show endorse a stock when i think the fundamentals of the underlying company are deteriorating. and i won't go near anything that could be headed toward bankruptcy. remember, accounting irregularities equal sell. but there's a whole lot of space between best of breed and one that's currently uninvestable. in normal circumstances, though,
the stocks of the lowliest companies that still pass the smell test sell for much more than i would ever be willing to pay for them. usually, because there are too many hopeful investors speculating unwisely on a low-dollar stock and buying barely adequate merchandise because it looks cheap when it's just selling for the appropriate discount, selling where it should be. however, if the price drops far enough, then it's perfectly okay to buy a stock when you merely have a low opinion of the underlying company. that is how much price matters. now, i get enormous volumes of hate mail on this subject, too, normally from people who are upset that i recommended selling a company that i previously said i liked after a big increase in its share price. just as even best of breed companies become too expensive at nosebleed heights, there are levels where worst of breed companies are cheap enough that
i need you to pull the trigger and do some buying. notice, worst of breed is different from just plain worst. a worst of breed business might not look like much compared to its best of breed competition, but at least it can get into the dog show. how do you know when the price is right on something you wouldn't otherwise buy? obviously there's a sliding scale here. the better the company, the more you should be willing to pay. if you're speculating, then it's worth looking for companies that have been left for dead. even though they still have a perfectly strong pulse on close inspection. we're avoiding these, but we're looking for others that could just be a little scary but might be healthy. there's no price you should be willing to pay for a company that could go potentially under. none. none. but if you're truly convinced that bankruptcy isn't on the
table and the street just has it all wrong, then buying an unattractive company at an attractive price could make a whole lot of sense for you. at the bottom of the barrel bank of america and sprint were both knocked down to prices that, frankly, were ludicrously cheap if you thought the government wasn't going to seize the first, and the second would be able to pay its bills. at less than $4 in early march of 2009, even if you liked other banks a whole lot more, as i did, a whole lot more than bank of america, as long as you thought it would survive and not be nationalized, then it was priced too low to ignore. and sure enough, the stock more than tripled in the next two months. ♪ hallelujah >> your key to buying bank of america was, of all things, a bullish interview with fed chief ben bernanke on the television show "60 minutes," saying no major bank would be allowed to fail. what a great time to jump into a major bank that everyone was
betting would be seized by the government before the interview took place. the next day bank of america's magnificent run took hold. as for sprint, this one looked touch-and-go at the beginning of 2009 with its stocks starting the year under $2. but even after it told us that it had enough cash to pay its debts, when it reported a bad but better than expected quarter on february 19th, you could still pick this stock up for $3.25. even though i thought sprint was by far the worst wireless carrier in the nation, even though it was hemorrhaging subscribers, it was still solvent and looking more and more like a takeover candidate every day. making the price just too good to ignore. if you were willing to hold your
nose, it gave you a 69% gain -- ♪ hallelujah -- in just three months. >> all aboard. >> and sprint actually turned out to be the best performer in the s&p 500 for the first quarter of 2009. those who thought it was too horrible missed a great entry point and a great trade. when it comes to higher-quality stocks, it's harder to find situations where something that doesn't interest you suddenly becomes worth buying because the price is right. simply because there aren't many times when a half decent stock trades down that low that i would want to pull the trigger. but if you keep your eyes peeled for companies raising money through equity offerings, which doesn't take much of an effort in an environment where there are so many trying to raise capital through secondaries to pay down debt that they otherwise couldn't, you could often find great deals on merchandise that you would never have looked at once, let alone twice. just in terms of price. on the same day, may 13th of 2009, both ford motor and bb &
t, that's a southern regional bank that had a lot of bad loans on its books but still looked like a survivor, sold stocks at radically discounted prices to where they were just a few days before. ford's secondary priced at a 5% discount to the previous day's close and a 24% discount to the previous week's. bb & t sold stock at a 10% discount to the previous day's close and a 27% discount to the close the week before. before bb & t got the deal done, the market was softened. so the price was able to spring back after the secondary. that plus the fact that the company was worth a heck of a lot more after it raised the money than before because its solvency was no longer in doubt, taken off the table. that made the secondary offering a steal. both deals immediately made you money. i don't care if you traded them or not. you made money. even if you had no prior interest in either ford or bb & t and thought they were both mediocre at best, as i did, at discounts that steep, both stock s
were clearly great buys. always keep your eye on the price because even less than stellar companies can turn out to be big winners if you get a chance to buy them low enough. do you know the ultimate example of this worst of breed buying that was so, so prescient was amd at the bottom -- at the end of 2008. amd, semiconductor company. hated here in cramerica and by me for 22 years. i hated it for 22 years. but when it hit $2, after agreeing to sell its problematic foundry division and after its graphic chip division began to take share from market leaders intel and nvidia, the opportunity was too great. i called this one a "hold your nose and buy" situation. and if you listened to me, you caught a double in a matter of months. here's the bottom line. price forces you to make new judgments about bad merchandise you that previously shunned. just as some fixer-uppers have a price that you wouldn't have want to pay at another time, stocks can get so cheap that
they become diamonds. clearly rough diamonds, but diamonds none the same. let's go to mark in ohio, please. mark. >> caller: hi, jim. here's an accidentally high dividend yield boo-yah from ohio. >> that's a sensible rule of 72 boo-yah right back at you. >> caller: hey, jim, i've been buying accidentally high dividend stocks to provide a steady stream of retirement income since about the first of the year. if i take some profit as my gains increase, the dividend revenues will decrease. several stocks are 15% to 25% above where i bought them. and should i take some off the table or let them ride as long as the fundamentals and dividends -- >> no, you should take some off the table. it's prudent. this is kind of a supplement or replacement to a bond theory. in bonds what happens obviously is sometimes you buy a bond at 90, it can go to 110, you know it's going to end up back at par or gibberish for 100 so, you sell it. now, stocks obviously have growth that bonds don't have.
but you're buying these stocks basically for what is the coupon for the dividend. the coupon being bond jargon. and i think as the dividend gets -- stays the same but the yield gets lower and lower, i need you to get back in the protection game. you sell a quarter of it up nicely. then a half of it cut down to a half. as the dividend gets to be smaller -- the yield gets to be smaller and smaller. and then you can come right back and buy as the stock regains what i would say more of its mutual value. a lot of stocks shot up way past the real value during the run after march, and a lot of people held on to them and then they came crashing back down and there was no room to buy. make room to buy those stocks with accidental high yields by scaling out of them as the yields get lower. russ, also in ohio. russ. >> caller: jim cramer. >> russ, what's up? >> caller: sending you a harvard on the hawking ohio university bobcats boo-yah. >> holy cow. let's mix the college metaphor boo-yah right at you.
and what's up there, chief? >> caller: all right, jim. if i'm targeting a short-term trade, say, ten days, should the fast and slow stochastic be measured against the ten-day chart? i thank you for any advice you can give on this technical indicator. >> look, i have to tell you, i would not -- i know this is going to not be helpful. but i am a 30-day chart guy, and i am a 30- -- i can be as much as a 30-week moving average guy. but i am not going to use the five- and ten-day a stochastic. it's too hard and has be worked for me. these are technical terms. i suggest people go to rick "top gun trader" bensignor. that's rick "top gun trader" bensignor, who does a lot of stochastic work and would certainly make me feel more comfortable if he felt that that was a good length of time. it's too short of time for me though.
and i do like to look at the charts. that's too short for me. patrick in illinois. patrick. >> caller: hi, jim. >> patrick, what's happening? >> caller: how are you doing? >> all right. how are you? >> caller: good. i want to throw out a big party boo-yah from lake springfield. >> not that familiar with that area, but it sounds pretty dynamite to me boo-yah. >> caller: yeah. so i've got some nice gains now. what's your strategy for holding till the one-year and one-day finish line? >> never, never, never be afraid to pay the tax man. it is one of my rules. it is such an important rule that i have referred to it in almost every single book that i have. people are putting way, way, way too much emphasis on taxes, not enough emphasis on whether the fundamentals have changed or whether they're being pigs. if you're being a pig because you're waiting for the tax man, well, let me just tell you, you're going to get your head cut off. remember, price matters. you don't always need to love the company. if the price is right, you can hold your nose and -- >> buy, buy, buy! >> but don't forget to -- >> sell, sell, sell! >> -- when the stock moves up. stay with cramer.
tonight's show is all about helping you better understand the new stock market environment and teaching you how to analyze stocks so you know when they're telling the truth and when you know you're being misled. [ booing ] how can stocks, inanimate pieces of paper, be honest or misleading? they can't. but the companies behind them can. which brings us to the subject of my next rule. i don't want you to take your cue from an inferior company when a worst of breed player says things are bad for the whole industry. don't just take it on faith. in every business there are strong and weak players. every sector has them. and the weak players will almost always seek to pin the blame for
their failings on the entire industry. believe them at your own peril. this happens endlessly, and people are fooled daily. for instance, when dell says things are bad and motorola says things are bad, you shouldn't necessarily sell the computer hardware or semiconductor stocks based on that because they're competitors and suppliers. now, let me tell you something. just on this one particular point. every time motorola has said things are bad and dell said things are bad, every single one of the players in that area, every single supplier sells off. religiously. apple. apple sells off. every single time. i mean, apple has very little to do with dell and motorola. other than the fact that it's considered tech. i mean, this is typical worst of breed behavior. and you can't generalize from it. i mean, let's be honest. you will never hear a company say, you know what? on a conference call. you're listening.
say we're doing poorly because our competitors have better execution, they're grabbing our market share and generally eating our lunch. no ceo in his right mind is going to come out on the quarterly conference call way shakespearean the fault to your shareholders is not in our stars but ourselves. you're never going to get that sort of revelation. the guy would simply get fired in an instant because shareholders don't always respond well to that level of honesty. you need to be able to recognize an excuse when you see it. when a motorola or a dell or any company that's gotten into the habit of serial year over year underperformance tells you their shoddy results were caused by an equally shoddy environment, the odds are good that you won't hear the same story from their stronger competitors. bad news for motorola is only bad news for motorola. if they tell you it's raining, the odds are pretty good that when you hear from apple, apple will mostly tell you that it must only be raining on motorola's side of the street. because business sure is fine
where they're standing. and remember, motorola, tech. apple, tech. that's it. that's about as close as they come together, is that broad rubric. you can't just assume all companies in the same industry are equivalent. sometimes there just isn't any pin action, meaning you can't extrapolate from one company's results to the rest of the industry. i don't want you to ever extrapolate from motorola to hewlett-packard. never. never extrapolate from dell to ibm. never. and that's most frequently the case when one of those companies is a loser. this happens in every industry. it's not just in tech. companies hide behind others in a sector when they drop the ball. by the way, we saw this with general mills, the cereal company. it had just gotten beaten viciously by kellogg. well, it said that the whole industry was slowing down. oh, wow. we also saw it with procter & gamble, which claimed that the world was rebelling from
high-priced products. what was the truth? colgate was running circles around it in almost every market around the globe where two competed against each other. you know we even saw this phenomenon play out in fast food, where burger king lamented that the consumer couldn't afford a hamburger today but apparently it could tomorrow, the same day that mcdonald's told us it was selling them by the billions. supermarkets, safeway kept complaining that the consumer was moribund. but whole foods was kicking butt and taking names. and walmart stole food shoppers away from traditional supermarkets. the bottom line, whatever the industry, when a company with a bad track record blames its poor performance on a tough environment, it's probably just making excuses. it's a crybaby. not telling you something that applies to its stronger co competitors, which are likely running circles around it. >> announcer: stay connected to cramer on madmoney.cnbc.com.
aflac is not more benefits at greater cost to your company insurance. aflac is not how do i fit it in my company's budget insurance. aflac is help protect and care for your employees at no cost to your company insurance. with aflac, your employees pay only for the coverage they want or need. and, the cost to you - nothing at all. if all you know about us is... duck: aflac! ...then you don't know quack. to find out why more businesses provide aflac, visit getquack.com.
money" where i'm doing everything i can to help beef up the disciplines that can make you a great investor. ♪ hallelujah this is a market that's full of misdirection. and if you simply trust what the people on television are saying, then you will get singed. this next rule, to paraphrase public enemy, is all about helping you to not believe the hype. see, not all upside surprises are worth getting excited about. that's something we hear endlessly. oh, upside's a plus. upside's a plus. you want to reach for the stock, right? whenever a company reports its quarterly results and its earnings per share are higher than what the analysts on wall street who research the company for a living had on average expected, then all the headlines about the quarter will describe it as an upside surprise. stocks are supposed to go up when the underlying companies they're attached to deliver
higher earnings than anyone had expected. but what the headlines call an upside surprise and what truly impresses the professionals in a quarter are two different things. this distinction can get confusing because sometimes when a company reports an upside surprise for the wrong reasons its stock will actually go down. for a regular investor looking at the coverage of a quarter the market seems arbitrary and capricious after that happens. if an upside surprise can't reliably send a stock higher, then what the heck can? and i'm not talking about situations where management also lowers its guidance, what it expects to earn in the future. at the same time as it delivers higher than expected earnings. then its stock will go down as that's not really baffling, right? when we buy shares in a company we care about, what it will earn in the future. not what it's already earned in the past. so if they lower guidance, it really doesn't matter what they say about the past. now, i'm not talking about that kind of confusion. i'm talking about the confusion that results from the headline
writers not drawing a serious distinction between a high-quality upside surprise and a low-quality illusory, almost sleight-of-hand upside surprise. we like companies that can deliver the first kind. but a low-quality sleight-of-hand-type of upside surprise doesn't attract much interest and is just fooling you. okay. so how do you tell the difference? simple. one's organic. the other's manufactured by management. a high-quality upside surprise, a real better than expected quarter, is generated by higher than expected sales, which then leads to better than expected earnings per share. stronger sales could mean a few different things, but they're all good. it could signal that the industry is improving and more people overall are buying a company's product. that's a great indicator when sales are higher that that's happening. or it could mean the company's taking market share from its competitors. or that it has growth coming
from an entirely new business. so a real upside surprise tells you either that the environment has improved or the company has improved. since both indicate that it should be able to grow its sales and its earnings at a faster clip in the future. and that's a reason to buy. as the big boys on wall street ultimately still value stocks based on growth of sales. it's very rare for a stock to go down off of this kind of high-quality sales-driven upside surprise. even when we were in the depths of our garden variety depression, these revenues on upside surprise stories advanced. as you can see by looking back at apple's phenomenal run regardless of the economy. which apple had produced upside after upside almost entirely based on much better than expected sales, particularly of the products, the iphone and the ipod. so what about this low-quality
sleight-of-hand kind of thing? it's easy to tell the two apart, even if the press rarely bothers to draw any kind of distinction. a low-quality earnings beat is based purely on a better bottom line. that's the earnings per share. better than the top line. that's the sales number. here are the upside surprises generated not by improved businesses, okay? but because management cut costs. maybe it manipulated the tax rate. all legal. aggressive legal accounting treatment. or maybe it brought back stocks so the report was magnified by the fact that there were fewer shares. it's now regarded as almost totally illusory by market professionals. as the increased earnings per share only indicate a smaller share count and not profits that were generally better than anyone was looking for. who does this stuff? you know what? almost all the food and drug companies often generate sleight of hand style upside surprises when they can't manage the real thing, there's very little true growth in either business. and this is the dirty little secret. the reason the big boys don't care about the so-called upside surprises even if journalists
think they matter, any large enough company with a halfway competent management that's in a predictable line of business, like the food and drug industry, not tech, can almost also ensure that its earnings per share beat the street's expectations, as long as the quarter isn't actually a really bad one. the food and drug names tend to fire a lot of people or use buybacks to generate earnings per share to generate upside surprise or they choose to repatriate as much as necessary from their foreign markets. the amount is totally at their discretion. to beat the estimates. it doesn't take anything special. it doesn't indicate that things are in any way any better. if just tells us that management is shrewd enough when it comes to making sure its earnings per share number doesn't disappoint anyone. if creating the upside is that routine, then it's really hard to consider it much of a surprise. here's the bottom line. now you can tell what the big boys on the wall street fashion show want to see in a quarter, and you won't make the confused
one of the most natural and misleading mistakes most people make is to assume that the people who are on tv criticizing the market, badmouthing it, telling you to sell or to avoid stocks, must be telling you the truth. wrong. don't assume that commentators who dislike the market are any more honest or any less self-interested than those who talk up the market or talk up individual stocks. whenever we hear someone touting a stock on television, we instantly accept the idea that they own it and treat everything they say with a healthy dose of suspicion. at least after this vicious bear market we have learned that much.
but we hardly ever reserve that level of skepticism for people who badmouth the market. more often than not, investor s will assume that people who criticize the market either don't have an agenda or must not be pushing one. why i mean if they're negative, they must be pure. to most people, expressing a negative view of the market is a way of automatically bolstering your credibility. to me, as someone who brought in about half of the profits at my old hedge fund by shorting stocks, this attitude is totally surreal. people who criticize the market on television or in print are not necessarily crying to help you. when someone says they like a stock, they're immediately branded a tapped. but when someone criticizes the market, how often do you think hey, wait a second, this person might be shorting the market or underinvested and is hoping to knock down stocks so he or she
can get a better price for them. it's easy to recognize many investors need stocks to go higher, but perhaps because the idea of shorting stocks is much less familiar to people, it's much less common to make the connection that some people actually need markets down. that's right, they need them down to do better. in fact, in my professional opinion, there's probably more chicanery and dishonesty coming from the shorts and their interaction with the media than the longs, the people who are buyers. you have to remember there are people out there who want to push prices down every bit as much as the touts who want to drive them up, if not more so. touts, shorts. the other issue is that while the money managers who come on television have to disclose their positions on any stock they talk about, they never have to tell you, i'm underinvested,
so i'm lagging the benchmarks. i'm getting left in the dust by my competitors. so it's vital i try to knock down the market to give myself a decent entry point and do better than the other guys. see, if these managers don't own anything and they're not short anything, there's nothing to disclose, right? but they still might very well have an interest in knocking stocks lower. you're just never going to hear about it. and believe me, at any given time, there are plenty of people in the industry who would benefit from a broad stock market decline and be more than happy to go on television and make the case that the decline is going to happen -- >> house of pain. >> -- and encourage you to get out. while you still can. all the hedge funds who were either net short, meaning that on the whole, they were betting on stocks to go down with more short positions than long ones, or they were simply underinvested and are now
underperforming, they're becoming more and more desperate. money managers who have been left behind by the market and their competitors start to feel like cornered rats getting ready to be butchered by a ferile feline. see, a lot of huj funds managers can't afford even one year of underperformance. i know this. you can't have more than one bad year. it takes a lot of build-up good will with your clients, meaning you have a pretty darn good record. if you want to explain to them how you barely made any money at a time when stocks everywhere were soaring and still have a business by the time you're through, may i suggest confessions of a street addict, if you doubt it. i detail what happens when you fall behind. you have to be careful, because when stocks are at their strongest, many of these hedge fund managers, the ones with the fewest scruples will happily
plant negative stories in the press and try to take advantage in the media to spread as much negativity as possible to get stocks down so that they can -- >> buy, buy, buy! >> i wish this wasn't the case. it would be wonderful if we lived in a world where everyone was honest and no one ever tried to manipulate the market. but since that's not the world we live in, the best way i know how to protect you from this kind of chicanery is by shining a light on it and making sure you know what to watch out for. the bottom line, remember to always be on guard.[gpj-c because the people bad-mouthing the market aren't any more altruistic or monest than the people who come on air and tout specific stocks. stay with cramer.